Should You Be Impressed By Gale Pacific's (ASX:GAP) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Gale Pacific (ASX:GAP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gale Pacific, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.051 = AU$7.0m ÷ (AU$192m - AU$56m) (Based on the trailing twelve months to June 2020).

Thus, Gale Pacific has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 24%.

View our latest analysis for Gale Pacific

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Gale Pacific, check out these free graphs here.

What Can We Tell From Gale Pacific's ROCE Trend?

The returns on capital haven't changed much for Gale Pacific in recent years. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 37% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Gale Pacific's ROCE

As we've seen above, Gale Pacific's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 53% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Gale Pacific, we've spotted 6 warning signs, and 2 of them are concerning.

While Gale Pacific may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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